AT&T + T-Mobile – The DOJ’s Case for Almost-Not-Quite-Price-Fixing

It’s a familiar argument in anti-merger proceedings against two prospective partners, and you’ve probably read it plenty of times before: With a manageable plurality of competitors in any market, it’s easier for the market to settle upon competitive price points. But when you make an argument any number of ways, any number of times, at some point you’re bound to say something that your opponent just may be able to poke a hole in.

That’s what might have happened yesterday with the U.S. Justice Dept.’s objection to AT&T’s proposed takeover of T-Mobile, filed yesterday in D.C. District Court. The DOJ team was making a point about the positive, beneficial state of affairs in the current wireless market.

The team, led by Acting Assistant Attorney General Sharis Pozen, mentioned how competition among the “Big Four” players – which also includes Verizon Wireless and Sprint – arrived upon nationwide pricing plans for carrier service. The way the attorneys made this case could be construed, from one angle, as saying these carriers worked together to arrive at these plans.

For a variety of reasons, there is little or no regional variation in the pricing plans offered by the Big Four nationwide carriers. Nationwide pricing simplifies customer service and billing, reduces consumer confusion that might otherwise result from regional pricing disparities, and allows the carriers to take advantage of nationwide advertising in promoting their services. Similarly, when the Big Four carriers make devices available to the public, they typically make them available nationwide. This too minimizes customers’ confusion and dissatisfaction, and allows the carriers to take advantage of nationwide marketing. In addition, the Big Four carriers generally deploy system technology on a nationwide basis, including critical components such as network standards, e.g., LTE or HSPA+. These technological choices are an important aspect of competition in the mobile wireless telecommunications services market.

The national decision-making of the Big Four carriers results in nationwide competition across local markets. Each of the Big Four firms making a competitive choice regarding a pricing plan, or other national competitive attribute, will consider competitive conditions across the United States, as the decision will take effect throughout the United States. Because competitive decisions affecting technology, plans, prices, and device offerings are typically made at a national, rather than a local, level, the rivals that affect those decisions generally are those with sufficient national scale and scope, i.e., the Big Four.

So the Justice Dept.’s case goes like this: There needs to be at least four carrier players on a truly nationwide scale to help set the market price for nationwide service. When one carrier makes a pricing decision, that impacts (read: “makes”) the other carrier’s decisions, because all changes at this level have immediate ripple effects.

It is not collusion – that’s not what DOJ is arguing in favor of. But it is suggesting a kind of detached, automatic market leveling system, which requires each of the players in the market to have a keen interest in what each other is doing, and how rapidly it can respond. And it reintroduces the notion of “nationwide marketing” not as the set of transactions that take place in a market, but rather the pool within which competition frolics, and the interplay of competitors in that market, the result being a kind of “togetherness” (my word, not DOJ’s) that benefits customers.

All of which leaves on the table the notion of four players working together to arrive at a mutually beneficial price.

The DOJ does go on to suggest that the reduction in the number of players on the national scale from four to three would create anti-competitive effects, and compel the remaining players to perhaps collude directly to fix prices. Although in the same breath, the team argues that the competitors most directly hurt by such an eventuality – smaller regional carriers and service providers – don’t have much of an impact on today’s market anyway.

As AT&T noted in connection with its acquisition of a regional carrier less than three years ago, that carrier’s pricing was “an inconsequential factor in AT&T’s competitive decision-making.”

The substantial increase in concentration that would result from this merger, and the reduction in the number of nationwide providers from four to three, likely will lead to lessened competition due to an enhanced risk of anticompetitive coordination. Certain aspects of mobile wireless telecommunications services markets, including transparent pricing, little buyer-side market power, and high barriers to entry and expansion, make them particularly conducive to coordination. Any anti-competitive coordination at a national level would result in higher nationwide prices (or other nationwide harm) by the remaining national providers, Verizon, Sprint, and the merged entity.

DOJ also argued that the absence of T-Mobile as an aggressive player – as someone who frolics in the pool of nationwide marketing quite briskly – would lessen the incentive for the remaining three players to utilize the same tools that the Big Four use now to establish fairer nationwide rates.

Sen. Al Franken (D – Minn.) is very much on the record opposing the proposed deal. This morning in a statement released to RWW, Sen. Franken applauded the DOJ’s move to block the merger: “I have long believed that this merger would be a terrible deal for consumers,” the statement reads, “and I’m pleased the Department of Justice has taken the wise step of officially opposing it. I’ve heard from families across Minnesota that cell phone expenses are an ever-rising percentage of their bills each month, and this merger could make wireless bills increase by as much as 25% – a burden families certainly don’t need in this tough economy. This merger would also hurt competition and concentrate enormous power in the hands of just two companies – AT&T and Verizon – who would control more than 80% of the wireless market. I’m glad the Justice Department recognizes that this merger would hurt consumers and I hope that the court will agree and block it from moving forward.”

Earlier today, Bloomberg News reported that AT&T CEO Randall Stephenson may be seeking ways to modify the proposed takeover deal to appeal to regulators, legislators, and the DOJ. This in order to avoid a reported $7 billion breakup fee payable to T-Mobile should the deal fall through.

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